This blog was last updated on June 18, 2024
UPDATE on the Legislative Future of VAT – May 16, 2016
The future of the VAT in Puerto Rico, including the rate increase for B2B and designated professional services, is now in the hands of the Governor. While both the House and the Senate of Puerto Rico passed legislation to repeal the VAT, the Governor is fully expected to veto the measure. Based on some technical problems with the legislation, the Governor will have until the 22nd of this month to act. Once the Governor acts to veto the bill, the legislature will again have the opportunity to repeal the VAT by an override of the Governor’s veto. Both the House and the Senate voted unanimously to enact this repeal, therefore, it is expected that they can easily override the Governor’s veto. The legislature only has until May 31, 2016, the end of this legislative session, to act and override a veto before the VAT actually takes effect. Meanwhile, the Puerto Rico Department of the Treasury (Hacienda) appears to have ceased issuing regulatory guidance pertaining to the VAT and has begun, once again, formally issuing regulatory guidance pertaining to the existing sales tax (IVU) on changes that were enacted last October regarding the taxation of certain services. We are closely watching how each branch of the government acts and will provide updates as the situation develops. For a full summary, please read the original blog below or we check out our additional relevant blogs chronicling this contentious issue and our portal for information about Puerto Rico’s sales tax reforms and actions.
As previously reported, on May 29, 2015 Puerto Rico enacted Law 72-2015 to replace their Commonwealth-level sales tax (locally known as IVU) with a Commonwealth-level Value Added Tax (VAT, or locally known as IVA), which would sit alongside the existing municipal-level sales tax. The law would also increase the tax rate applicable to professional and B2B services from 4% to 10.5%. This change was originally scheduled to be implemented on April 1, 2016. However, it was delayed until June 1, 2016, by an act of the Secretary of the Treasury Department of Puerto Rico. But, as we approach June 1, there is reason to believe that the VAT may not go into effect as currently required under the law.
Current Legislative Actions Being Taken that Could Determine the Future of VAT in the Commonwealth of Puerto Rico
There is a substantial movement afoot in the Puerto Rico legislature to repeal the VAT, even before it ever begins, and eliminate the increase in the tax rate as it applies to professional services and B2B transactions. While the Governor of Puerto Rico stands squarely behind the VAT, both parties in the legislature seem to be in agreement that the VAT should be stopped altogether. The House of Representatives has already approved a measure (P.C. 2032), which definitively cancels the VAT as well as the increased tax rate for professional and B2B services. It appears that the Senate will be voting to approve the measure in the next few days. And, even though the Governor of Puerto Rico is expected to veto the bill, he must do so within 10 days of receiving it, which leaves the legislature plenty of time to override the veto before the end of the legislative session and before the VAT is scheduled to take effect. Although anything is possible in the world of politics, it seems like the legislature has the necessary votes to override the veto. In spite of these developments, the Treasury Department of Puerto Rico (Hacienda) seems to be moving full steam ahead in planning for the new VAT. Several Circular Letters, Administrative Determinations, and tax forms have been issued by the Hacienda detailing the mechanics of how the VAT will be collected, remitted, and reported come June 1, 2016. Likewise, the Hacienda seems to be moving forward with their plan to adopt new automation, some of which is directly intended to support the VAT. Some of the more important pronouncements are summarized below.
The New Compliance Portal: SURI
Also slated to take effect on June 1, 2016 is the implementation of the new electronic system known as the Unified System of Internal Revenue (“SURI”) that will allow businesses to report transactions related to VAT from anywhere using a computer with internet access. This new system would serve to allow all existing commercial registrants currently registered under IVU, to validate and update their profile and receive a new VAT-related Merchant’s Registration Certificate (with the same number). It is through this system that Hacienda would transfer the balance of verified IVU credits accumulated by qualifying taxpayers as off May 31, 2016. Much (but not all) of the new functionality in SURI was created in anticipation of the VAT going into effect on June 1, 2016, which leaves open when, and how, the SURI system will be utilized if the VAT does not go into effect. As designed today, it was expected that SURI would work alongside the existing PICO system for a time, during which many of the PICO functions will be transferred to SURI. It is important to note that taxpayers doing business in Puerto Rico should be on the lookout for official notifications received from the Treasury Department as to any requirements stemming from the adoption of the SURI system, regardless of whether the VAT takes effect.
Requirements Entirely Contingent on the VAT Taking Effect
- Under the VAT, the first monthly VAT Return (which is a single form) can only be filed through SURI, and will be due by July 20, 2016 (for transactions completed in the month of June). SURI is anticipated to be ready for this first VAT filing as of July 1st, 2016. Under the existing VAT provisions, tax filers must exhaust IVU credits in their first VAT filing (due July 20), before they can claim credits for VAT paid from June 1, 2016.
- Certain other filings will still take place through the PICO system, including the following:
- Import Statements (Form SC 2970)
- Monthly Return Import Tax (Model 2915D SC), for periods prior to June 1, 2016
- Monthly Return on Sales Tax and Use Applicable to Contracts and Auctions Pre-existing (Model SC 2915E) until the return corresponding to the month of June 2016
- Monthly Return Sales and Use Tax (Model SC 2915A) for periods prior to June 1, 2016 or any amendments to previously filed returns
- Monthly Return and Sales Tax Applicable to Use Rendered Services Professional Services Other Traders and Appointed Officials (SC Models 2915F) for periods prior to June 1, 2016 or any amendments to previously filed returns
- Active Registration Certificates and any Registration Certificate that was set to expire as of January 1, 2016, is currently slated to expire in the month of July. All Registrations would be replaced by VAT Registration (obtained through SURI—after June 1, 2016). The same is true for any existing Eligible Reseller Certificates. However, if the VAT is repealed by the pending legislation in Puerto Rico’s legislature, we expect Hacienda to issue another official communication addressing how expiring IVU Certificates and Registrations can be renewed.
Sovos is closely following these legislative changes in Puerto Rico and will update our clients and our offerings as circumstances require.
